Thursday, 8 August 2013

How is the Eurozone Doing? Still Extremely Fragile.

As EUROSTAT publishes new data, we update our quarterly analyses of the Complexity and Resilience of the Eurozone. The situation as of Q4 2012 is as follows:

Complexity. A growing economy becomes necessarily more complex (see black curve below). However, at the same time it is important to stay away from the so-called critical complexity (red curve). Before the crisis has crippled the global economy things are proceeding relatively low although the two curves were already quite close. Since complexity has peaked in early 2008 there has been a persistent reduction of complexity, equivalent to the loss and destruction of what has been created in the past. In mid-2011 the situation has stabilised but still dangerously close to critical complexity. In other words, the situation is that of extreme fragility. This means that the system is not in the condition to absorb shocks or contagion without major consequences. Moreover, there is no clear signal of recovery apart from the mild growth of complexity in the second half of 2012.

It is interesting is to see complexity for the core 15 EU member states and the 12 which have joined later (for Croatia there is insufficient data to incorporate it in the analysis). It appears that the group of 15 (red curve below) are indeed on a road to mild and sustained recovery. The remaining 12 nations are still on a downward path with indications of stabilisation.

However, what counts is the system as a whole. The resilience (robustness) of the EU27 system is indicated below. There is a mild upward trend but the value of resilience is below 50% which reflects extreme fragility. Certainly the system does not contain triple-A components, as the Rating agencies claim.

Based on the above plots one can infer how the crisis has so far destroyed approximately ten years of growth. And it's not over yet. The oscillatory character of the curves over the past 12-18 months suggests a state of prolonged stagnation. The next 3-4 quarters will show for sure.

You can run the above analysis yourself here: